Since Crowdfunding has become so popular in many business and social circles today, its concept has expanded into offering different options. One of the most recent options is equity crowdfunding, and it is based on the concept of people owning a part of the company instead of receiving reward based incentives for joining.
Crowdfunding is for those who are seeking to obtains funds that range in the $50,000 and more. Typically, these companies have already gained enough traction and have the appropriate amount of social proof in order to attract backers that want to own a small part of the company that they operate.
Unlike reward based crowdfunding, the backers are usually much more involved in the fundraising process. Even though the interest is high in these types of business ventures, its important to note that the regulations of equity crowdfunding is still in its infancy stages. Especially, because there are new federal regulations involved and can also become relatively difficult to navigate through. So, for those who are interested in equity crowdfunding and what it has to offer, here’s some invaluable information that can assist with launching an equity crowdfunding campaign.
To start, this communique involves setting the terms for fund raising, making preparations for the campaign, getting an understanding of the new legislation, and driving new investors to the business.
Setting the Terms
Before a business owner can set the terms for any equity round, they will need to consider the following criterion that needs to be determined. The decisions made will often determine how successful the campaign will be and how many potential backers and momentum that they can gain.
Raise Amount – When a business owner gets started, one of the first pieces of information that they will need to know and have available is the amount that they intend to raise for the project that they launch. The amount to be raised may cover the cost of new equipment, operating expenses for a specific timeframe, or the building of a new facility. Regardless to the type of capital venture, it is important for the business owner to have an accurate specification of what they will need in total. It’s also important that the goal amount be low enough for the goal to be surpassed, but also high enough to cover the cost of the venture.
The duration of the campaign can vary. However, there are some typical timeframes and required time allotments that people should be aware of. Typically, the business owner sets the timeline for the campaign when it is being deployed. This time is based on numerous factors including the amount that they will need to raise, supporting documentation needed as well as the percentage of its completion. All of which can drive the time that it takes in closing out the campaign successfully with the funds that’s needed.
It is also important to note that all of the power is not in hands of the business owner, specifically since prospective investors have some leeway too. In specific, the renewal and withdrawal dates falls in 90 days. Which means, the business owner will have this timeframe to work within if they want to keep those who are interested engaged, and committed with the arrangements that they have agreed upon.
Equity Vs Convertible Debt
Many times the start up round for raising funds usually includes terms that involve straight equity instead of convertible debt. Both parties will need to understand the differences between each so that they can make an informed decision.
With straight equity, the investor will receive a specified valuation in the business that they can depend upon. Contrariwise, when the business owner offers convertible debt, the valuation in the business owned is not defined until a later time. This means the business owner retains their ownership until such time changes are made in the terms. Though the investor who elects to take convertible debt may not know exactly what they are getting, they are normally attracted to these terms because they will receive a discounted rate when the campaign gets to later rounds.
Valuation can be described as the proposed value of the business at the time in which the investment is made. In specific, the valuation of the business is the present value of the business, and the proposed raised amount. Therefore, it is essential that the owners are raising the appropriate amounts in advance.
What’s factors are included in Valuations?
Because there are numerous other factors involved in setting the value of the business in its earliest stages, it can be a little tricky to calculate. This is because the calculation of equity should also include:
Traction is possibly the most valuable asset that the business owner will have, and it plays a significant role in determining the valuation. In a nutshell, traction entails achieved social proof, users acquired, momentum of the campaign, pre-orders acquired, amount of exposure and endorsements, and commitment from partners.
Investors will also look at its overall reputation, which consists of seasoned team of backers, veteran Board of Directors comprised from the appropriate industry, and successful entrepreneur involvement.
Valuation is normally a balancing act because there so many different factors involved. From measuring how many paying customers are already on board to making sure the business is positioned for rapid growth, investors are looking to see solid evidence of where revenues will be coming from.
Investors are looking for campaigns that’s currently hot, which means, the higher the valuation the more appealing the investment.
Preparing the Launch
Preparing the launch is a major factor in the success of an equity crowdfunding campaign. Dissimilar to reward based, everything needed must be gathered in advance or the business owner must have a plan in place that allow them to respond quickly. It is also important to note that delays in the process can compromise its success greatly.
This said, it is important for business owners to have a comprehensive view of everything that will be needed including, an overview of the business, how the operations products work and a effective strategy for developing the business.